Capitalism is a socio-economic system that allows private owners to profit from the goods and services they provide. One of the cornerstones of this system is the right of the individual to choose what to produce, how to produce it, and what price to sell it for. It is popular in nations that value the freedom of the individual over the stability of the society. Most modern nations use some form of capitalism, such as state, corporate, or social market.
How It Works
Also known as the free market system, capitalism requires unregulated supply and demand and little or no government interference in matters of trade. Each individual is free to produce what he or she wants and to sell it at whatever price the market will support. These decisions are typically made by the laws of supply and demand: if there is no demand for a particular product, the producer won't be able to make a profit, but if the demand is high, he or she can sell a lot of goods.
In an ideal world, everyone benefits because producers only create what people want and consumers will only pay what they think the product is worth. The more demand there is for a product, the more goods are produced, and — ideally — the more the price goes down. In this system, competition between businesses is good for consumers because it too drives prices down and, theoretically, improves the quality of the products being sold.
The unregulated market, also known as laissez-faire capitalism, named for a French term that means "let it be," occurs when the government has no control over trade and economic concerns and allows the market total freedom. No modern nation operates this way because, in practice, the system seldom works in an ideal fashion. Rather than increasing supply and driving down the price of an in-demand product, for example, a company may keep production levels low in order to continue charging higher prices. Nearly all modern "capitalist" societies are actually mixed economies, with government-controlled competition and labor policies in place to help protect consumers, businesses, and workers.
Labor and Capital
A capitalist system operates on wage labor, with people being paid in money rather than goods or services (though some companies also supplement a laborer's income with goods and services, such as stock options). Labor works according to the laws of supply and demand as well; the more available workers who can do a particular job, the less an employer will have to pay them for their work. Workers also have the freedom to sell their services to different employers so that, if one company does not treat them well, they theoretically have the ability to quit and find a job somewhere else.
Since laborers must be paid for their work, a business requires some sort of start-up money, called capital, in order to run. This can come from a government loan, a private investment, or capital from another business owned by the same individual or corporation. Without capital, which is anything of value that has the capacity to create more wealth, businesses cannot survive in a capitalistic society.
One reason that pure capitalist systems tend to not work in an ideal way is because of the relationship between labor, or the working class, and the people who own the means of production, also called the owner class. The owner class tends to become more and more wealthy, while the working class is dependent on the owners for their survival. This can lead to distrust and unrest, especially in situations where workers feel like they are not being paid enough or are being treated unfairly in other ways. While workers can change jobs in theory, this is only possible if there are other jobs available and if those companies do, in fact, treat their workers better. Many countries have labor laws that regulate minimum wage, child labor, health and safety standards, and other areas of concern to help keep the balance of power between labor and owners a bit more even.
The Economy and the Society
Capitalism is considered a socio-economic system, not just a way of earning money and making a living. This is because it is a way of thinking about social organization; in this social-economic system, individualism is paramount and individuals must be granted the right to economic freedom. People have the right to earn money in whatever job they choose, and to spend that money however they want. In addition, those individuals must keep buying products to keep the market moving. This leads to a focus on consumerism, with people primarily defining themselves within society based on what they own rather than what they do.
Socialism is considered to be the opposite of this system because it is based on what benefits society as a whole rather than what benefits the individual. In a socialist state, the government owns most or all of the means of production and goods are produced based on what people need rather than to produce a profit. Ideally, this means that wealth is distributed evenly and there is no unemployment. As with capitalism, however, the system rarely works in an ideal fashion, and there are many different forms of socialism practiced in reality.
Types of Modern Capitalism
Nearly all modern capitalist nations actually have mixed economies, and use a blend of capitalist ideas and other systems. While some aspects of the economy may be left alone, others, such as wages or safety procedures, may be carefully monitored by the government. There are at least four main types of capitalism, although different countries use variations of each:
- Market systems operate with limited interference from the government, allowing supply and demand to create a balanced market.
- Corporate systems rely heavily on capital moving through large, powerful, for-profit corporations.
- Social market systems typically include more government involvement in social welfare systems and public services.
- State-led systems are different from the others in that the government owns the means of production, but runs them in order to make a profit.
17th century English Puritans, who were known for their strong work ethic, are often cited as the first modern capitalists because of their focus on the importance of productive labor. The origins of capitalism actually go all the way back to 16th century Europe, however, when the decline of feudalism, in which people were granted protection and possession of land in exchange for services to the lord who held the land, led to the rise of mercantilism. Mercantilism is focused on the production of goods and trade between countries, with state governments often wielding significant control.
The worldwide trade that flourished in the Age of Discovery, when nation-states were being formed and much of the world was being explored and colonized, was capitalistic in the sense that it allowed individuals and nations to generate profit. Governments and companies often worked together to increase the wealth of those companies and the state, maximizing the amount of goods that were exported and putting up barriers to keep the amount of imported goods as low as possible. During this time, powerful nations often profited mostly because they exploited the resources of less-powerful regions.
The Age of Discovery set the stage for the 17th century Age of Enlightenment, an era marked by a growing sense of individualism and a desire for greater choice. During this era, people began to take hold of their own destinies, pursuing careers and selling goods and services that they felt would allow them to profit. Though the people who lived in these centuries were becoming more capitalistic in nature, it wasn't until the Industrial Revolution this new system took off.
The Birth of Modern Capitalism
The birth of the factory in the mid-18th century is often cited as true beginning of capitalism. By creating goods that were in demand and streamlining labor, factory owners were able to maximize their profits. At this time, economists, including Adam Smith, began discussing the merits of letting the "invisible hand" take control of a country's economy. In the 19th century, the United States approached a state of true laissez-faire, but the Great Depression put an end to the unregulated business that this system demands and introduced more government control over the market.